by Alasdair MacLeod
Gold Money
In this article we look at the consequences of contracting bank credit on the economy, financial markets, and commodities. It is a developing global condition.
Why is bank credit on the verge of a substantial contraction? The starting point is record bank balance sheet leverage in the Eurozone and Japan, high bank leverage rates elsewhere, and a sea-change in the interest rate environment. In short, instead of being greedy for profits, senior bankers are now growing scared of risk and of their exposure to it.
The effect on the non-financial economy will be to cause nominal GDP to slump because every transaction that makes up GDP is settled through credit — nearly all of it is bank credit. Contracting bank credit will simply drive GDP into the ground.